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Tuesday, 21 October 2014

Is Itau Unibanco poised for transformational US takeover?

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Not even RBS CEO Stephen Hester’s assertion last Friday that Citizens Financial Group (the group’s US$130bn US commercial bank holding company) constituted a core business was sufficient to dispel talk that the business is potentially up for sale.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

Indeed, speculation emerged over the weekend (courtesy of The Sunday Times of London and splashed all over the media) that Brazilian megabank Itau Unibanco is poised to bid for the Citizens business, which has grown consistently on the back of 26 acquisitions since its own acquisition by RBS in 1988 and which at the end of the first half of this year was the 21st largest financial group in the US.

The line of thinking is that RBS would use Citizens’ US$16bn potential price tag to redeem a portion of the UK government’s 82% stake.

I do wonder, though. Hester pointed to Citizens’ rising value driving off its positive performance. And in the second quarter of 2012, Citizens entered into a referral partnership with investment bank Oppenheimer & Co that will enable Citizens’ commercial bankers to broaden their tool kit by offering corporate finance (M&A, JVs, divestitures) and equity underwriting to clients.

While that does not in and of itself mean a sale is not on the cards, adding product power through third-party arrangements at this point doesn’t suggest selling is necessarily uppermost in management’s minds. But then again, I guess it depends more on the imperatives at group level.

In any case, such a move by Itau Unibanco would signal a major increase in the bank’s ambitions outside of Brazil but it would at the same time be consistent with recent talk that senior management is keen to flex its muscles outside its home market.

So far, Itau Unibanco’s international expansion has been modest and additive rather than transformational. Only 6,500 of the group’s 99,000 employees work outside of Brazil

Beyond Citizens, Itau is also said to be eyeing Santander’s Sovereign Bancorp’s unit as well as BNP Paribas’ BancWest subsidiary. Of course, it’s a great time to be shopping, especially for ring-fenced or partially ring-fenced operations of European banks for which selling is always an option in the current deleveraging cycle.

Beyond Santander and BNPP, the likes of BBVA have Compass Bancshares in the US, while it’s no secret that Societe Generale is evaluating the sale of its US asset management business TCW.

So far, Itau Unibanco’s international expansion has been modest and additive rather than transformational. Only 6,500 of the group’s 99,000 employees work outside of Brazil. Even adding Citizens’ 19,700 staff would still leave 80% of total employees in Brazil.

Regulatory approval

To-date, Itau’s M&A activity has been close to home. Last month, the group received regulatory approval to establish a subsidiary in Colombia, allocating US$100m of initial capital into the new venture. Activities are expected to commence in Q4, at which time the group will inject a further US$100m.

In Chile, Itau acquired 50% of the shares in Chilean investment adviser Munita, Cruzat & Claro in the second quarter of 2012 to build out its offering to wealthy clients.

The group certainly has clout and would be able to finance a chunky acquisition. Total capital amounted to over almost R$76bn (US$37.5bn) at the end of Q2 and Itau has been actively raising subordinated Tier 2 debt in the capital markets this year to bolster its capital position. In doing so, the bank proved it is popular with international investors.

Last week, the group sold a new US$1.375bn 10-year Tier 2 subordinated note that was increased from US$1.25bn. The new notes added to a similar US$1.25bn offering in March as well as a US$500m retap of its existing 2021 notes back in January, which at the time achieved the tightest new-issue premium for a Latin American bank.

In the second quarter, the group generated an annualised return on average equity of 17.9%, while the return on allocated capital of investment bank Itau BBA hit an annualised 20.7%. Itau BBA is arguably the leading multi-product investment bank in Brazil, outgunning BTG Pactual, Banco BBI and Banco do Brasil in most of the Anbima domestic rankings (across equity/debt origination and distribution, and M&A).

Top ranking

In Thomson Reuters’ league tables for all YTD announced M&A with any Latin American involvement, Itau BBA is the highest-ranking domestic house at 7th, ahead of BTG Pactual (11th); Bradesco (12th) and BR Partners (15th). Itau BBA also maintains a leading position in CETIP in corporate OTC derivatives which focuses on currency, rates and commodity hedging for clients. In the first half of the year, the bank said its volumes were 43.4% higher than the same period of 2011.

International expansion, however, will be more geared around Itau’s commercial banking platform rather than its investment banking footprint. The group has a reasonable Latin American network; adding a sizable US commercial banking franchise would certainly fit with its plans to grow its foreign trade, export and project finance business, finance corporate partnerships between Latin America and the rest of the world, and finance the international expansion plans of Latin American companies in key export markets.

But down to brass tacks: am I putting my hard-earned cash at risk betting that a deal of this type will happen in the short term? I must say I do like the conceptual notion of a South American banking behemoth buying its way into a domestic US commercial banking business (with 1,500 branches in the case of Citizens).

Stranger things have certainly happened in banking, but … I don’t know … I just wonder if it’s a bit of a stretch. So at the risk of foregoing some merger arb profits, I’m keeping my wallet firmly closed. But I do hope a deal happens nonetheless.

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